More Malls Don’t Make the Cut, Fitch Says

Fitch Ratings on Friday said its “very cautious” view on U.S. retail malls has kept it from rating some commercial mortgage-backed securities this year, a sign financing for some of the sector’s mid-tier properties is becoming tougher to come by.

The Fitch report comes as U.S. malls have struggled in recent years due to the rise of online shopping, tepid consumer spending and the fallout of decades of retail overbuilding. In addition, for many mall stalwarts such as Gap IncSears Holdings Co. and Abercrombie & Fitch Co., the days of rapid expansion have ended. Those chains are now focused on trimming their store count and squeezing better performance out of their existing locations.

“It’s very easy to identify the best malls and the worst malls, but the more difficult nuance is understanding the middle tier and whether they are going to be around in 10 years,” said Huxley Somerville, an analyst at Fitch. Mid-tier malls often have common anchor stores, making them less unique.

Mall vacancies rose sharply in recent years and only recently declined slightly. The average mall vacancy rate in the top 80 U.S. markets in the second quarter was 8.9%, down slightly from the 12-year high of 9.4% set in last year’s third quarter, according to Reis Inc., a real estate research company. Reis mall-vacancy goes back only to 2000.

Several big malls’ loans have been financed with CMBS this year, and have often represented the biggest share of collateral in the large multi-loan issues that are the bread and butter of Wall Street securitizations. Fitch said concerns about malls’ survival have led it to cut the proceeds allowed under its AAA rating, which reduces an issuer’s profit because lower-rated bonds are sold more cheaply.

A more conservative view on malls by rival Moody’s Investors Service in recent months has sent some dealers shopping for ratings, seeking analyses that approach the sector more favorably.

The bifurcation of the mall industry into strong properties with increasing sales and weaker properties that are losing both tenants and sales has many mall-industry leaders predicting most cities will end up with one to three dominant malls and a bunch of failing also-rans.

Green Street Advisors Inc., which tracks real estate investment trusts, has predicted 10% of the roughly 1,000 enclosed malls in the U.S. will fail in the next decade to the point that their primary use no longer is retail. Many leading mall executives have said the 10% prediction is too low.

“A mall with strong sales today and located in a robust demographic market may be just as prone to future declines as new competition is attracted to an area,” said Mary MacNeill, another Fitch analyst.